Question 1

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Accepted Answer

A)   Revenues from an existing product would be lost as a result of customers switching to the new product.
B)   Shipping and installation costs associated with a machine that would be used to produce the new product.
C)   The cost of a study relating to the market for the new product that was completed last year. The results of this research were positive, and they led to the tentative decision to go ahead with the new product. The cost of the research was incurred and expensed for tax purposes last year.
D)   It is learned that land the company owns and would use for the new project, if it is accepted, could be sold to another firm.
E)   Using some of the firm's high-quality factory floor space that is currently unused to produce the proposed new product. This space could be used for other products if it is not used for the project under consideration.F) All of the above
G) A) and B)

Question 2

To increase productive capacity,a company is considering a proposed new plant.Which of the following statements is CORRECT?

Accepted Answer

A)   Since depreciation is a non-cash expense, the firm does not need to deal with depreciation when calculating the operating cash flows.
B)   When estimating the project's operating cash flows, it is important to include both opportunity costs and sunk costs, but the firm should ignore the cash flow effects of externalities since they are accounted for in the discounting process.
C)   Capital budgeting decisions should be based on before-tax cash flows.
D)   The WACC used to discount cash flows in a capital budgeting analysis should be calculated on a before-tax basis.
E)   In calculating the project's operating cash flows, the firm should not deduct financing costs such as interest expense, because financing costs are accounted for by discounting at the WACC. If interest were deducted when estimating cash flows, this would, in effect, "double count" it.F) A) and D)
G) A) and C)

Question 3

Any cash flows that can be classified as incremental to a particular project-i.e.,results directly from the decision to undertake the project-should be reflected in the capital budgeting analysis.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.
B)   A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
C)   Sunk costs were formerly hard to deal with but now that the NPV method is widely used, it is possible to simply include sunk costs in the cash flows and then calculate the PV of the project.
D)   A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm's existing stores.
E)   A sunk cost is any cost that must be expended in order to complete a project and bring it into operation.F) D) and E)
G) A) and B)

Question 5

Shultz Business Systems is analyzing an average-risk project,and the following data have been developed.Unit sales will be constant,but the sales price should increase with inflation.Fixed costs will also be constant,but variable costs should rise with inflation.The project should last for 3 years,it will be depreciated on a straight-line basis,and there will be no salvage value.This is just one of many projects for the firm,so any losses can be used to offset gains on other firm projects.What is the project's expected NPV?   WACC 10.0% Net investment cost (depreciable basis)  $200,000 Units sold 50,000 Average price per unit, Year 1 $25.00 Fixed op. cost excl. deprec. (constant)  $150,000 Variable op. cost/unit, Year 1 $20.20 Annual depreciation rate 33.333% Expected inflation rate per year 5.00% Tax rate 40.0%\begin{array}{lr}	ext { WACC } & 10.0 \% \	ext { Net investment cost (depreciable basis)  } & \$ 200,000 \	ext { Units sold } & 50,000 \	ext { Average price per unit, Year 1 } & \$ 25.00 \	ext { Fixed op. cost excl. deprec. (constant)  } & \$ 150,000 \	ext { Variable op. cost/unit, Year 1 } & \$ 20.20 \	ext { Annual depreciation rate } & 33.333 \% \	ext { Expected inflation rate per year } & 5.00 \% \	ext { Tax rate } & 40.0 \%\end{array} WACC  Net investment cost (depreciable basis)   Units sold  Average price per unit, Year 1  Fixed op. cost excl. deprec. (constant)   Variable op. cost/unit, Year 1  Annual depreciation rate  Expected inflation rate per year  Tax rate ​10.0%$200,00050,000$25.00$150,000$20.2033.333%5.00%40.0%​

Accepted Answer

A)   $15,925
B)   $16,764
C)   $17,646
D)   $18,528
E)   $19,455 F) A) and C)
G) B) and C)

Question 6

It is extremely difficult to estimate the revenues and costs associated with large,complex projects that take several years to develop.This is why subjective judgment is often used for such projects along with discounted cash flow analysis.

Accepted Answer

A) True 
 B)False

Question 7

If debt is to be used to finance a project,then when cash flows for a project are estimated,interest payments should be included in the analysis.

Accepted Answer

A) True 
 B)False

Question 8

The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?

Accepted Answer

A)   Shipping and installation costs.
B)   Cannibalization effects.
C)   Opportunity costs.
D)   Sunk costs that have been expensed for tax purposes.
E)   Changes in net working capital.F) A) and D)
G) A) and E)

Question 10

Typically,a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation.This is because the total cash flows over the project's life will be higher if accelerated depreciation is used,other things held constant.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to increase.
B)   The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.
C)   Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.
D)   Identifying an externality can never lead to an increase in the calculated NPV.
E)   An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality.F) B) and D)
G) All of the above

Question 12

Century Roofing is thinking of opening a new warehouse,and the key data are shown below.The company owns the building that would be used,and it could sell it for $100,000 after taxes if it decides not to open the new warehouse.The equipment for the project would be depreciated by the straight-line method over the project's 3-year life,after which it would be worth nothing and thus it would have a zero salvage value.No new working capital would be required,and revenues and other operating costs would be constant over the project's 3-year life.What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.)    WACC 10.0% Opportunity cost $100,000 Net equipment cost (depreciable basis)  $65,000 Straight-line deprec. rate for equipment 33.333% Sales revenues, each year $123,000 Operating costs (excl. deprec.) , each year $25,000 Tax rate 35%\begin{array}{lr}	ext { WACC } & 10.0 \% \	ext { Opportunity cost } & \$ 100,000 \	ext { Net equipment cost (depreciable basis)  } & \$ 65,000 \	ext { Straight-line deprec. rate for equipment } & 33.333 \% \	ext { Sales revenues, each year } & \$ 123,000 \	ext { Operating costs (excl. deprec.) , each year } & \$ 25,000 \	ext { Tax rate } & 35 \%\end{array} WACC  Opportunity cost  Net equipment cost (depreciable basis)   Straight-line deprec. rate for equipment  Sales revenues, each year  Operating costs (excl. deprec.) , each year  Tax rate ​10.0%$100,000$65,00033.333%$123,000$25,00035%​

Accepted Answer

A)   $10,521
B)   $11,075
C)   $11,658
D)   $12,271
E)   $12,885 F) C) and D)
G) All of the above

Question 13

Your new employer,Freeman Software,is considering a new project whose data are shown below.The equipment that would be used has a 3-year tax life,and the allowed depreciation rates for such property are 33.33%,44.45%,14.81%,and 7.41% for Years 1 through 4.Revenues and other operating costs are expected to be constant over the project's 10-year expected life.What is the Year 1 cash flow?   Equipment cost (depreciable basis)  $65,000 Sales revenues, each year $60,000 Operating costs (excl. deprec.)  $25,000 Tax rate 35,0%\begin{array}{ll}	ext { Equipment cost (depreciable basis)  } & \$ 65,000 \	ext { Sales revenues, each year } & \$ 60,000 \	ext { Operating costs (excl. deprec.)  } & \$ 25,000 \	ext { Tax rate } & 35,0 \%\end{array} Equipment cost (depreciable basis)   Sales revenues, each year  Operating costs (excl. deprec.)   Tax rate ​$65,000$60,000$25,00035,0%​

Accepted Answer

A)   $30,333
B)   $31,849
C)   $33,442
D)   $35,114
E)   $36,869 F) All of the above
G) B) and D)

Question 14

In your first job with TBL Inc.your task is to consider a new project whose data are shown below.What is the project's Year 1 cash flow? Seles revenues  &emsp;  &emsp;  &emsp;  &emsp;  &emsp;  &emsp;  $22,250\$ 22,250$22,250 
Depreciation  &emsp;  &emsp;  &emsp;  &emsp;  &emsp;  &emsp;  $18,000\$ 18,000 $18,000 
Other aperating casts  &emsp;  &emsp;  &emsp;  &emsp;   $12000\$ 12000$12000 
Tax rate   &emsp;  &emsp;  &emsp;  &emsp;  &emsp;  &emsp;  &emsp;  &emsp;  &emsp;   35%35 \%35%

Accepted Answer

A)   $8,903
B)   $9,179
C)   $9,463
D)   $9,746
E)   $10,039 F) A) and E)
G) A) and D)

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   Only incremental cash flows are relevant in project analysis, the proper incremental cash flows are the reported accounting profits, and thus reported accounting income should be used as the basis for investor and managerial decisions.
B)   It is unrealistic to believe that any increases in net working capital required at the start of an expansion project can be recovered at the project's completion. Working capital like inventory is almost always used up in operations. Thus, cash flows associated with working capital should be included only at the start of a project's life.
C)   If equipment is expected to be sold for more than its book value at the end of a project's life, this will result in a profit. In this case, despite taxes on the profit, the end-of-project cash flow will be greater than if the asset had been sold at book value, other things held constant.
D)   Changes in net working capital refer to changes in current assets and current liabilities, not to changes in long-term assets and liabilities. Therefore, changes in net working capital should not be considered in a capital budgeting analysis.
E)   If an asset is sold for less than its book value at the end of a project's life, it will generate a loss for the firm, hence its terminal cash flow will be negative.F) B) and C)
G) B) and D)

Question 16

In cash flow estimation,the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows.

Accepted Answer

A) True 
 B)False

Question 17

The change in net working capital associated with new projects is always positive,because new projects mean that more working capital will be required.This situation is especially true for replacement projects.

Accepted Answer

A) True 
 B)False

Question 18

Changes in net working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets,not working capital.

Accepted Answer

A) True 
 B)False

Exam 11: Cash Flow Estimation and Risk Analysis

Correct Answer
verified

Changes in net working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets,not working capital.

Correct Answer
verified

To increase productive capacity,a company is considering a proposed new plant.Which of the following statements is CORRECT?

Correct Answer
verified

The change in net working capital associated with new projects is always positive,because new projects mean that more working capital will be required.This situation is especially true for replacement projects.

Correct Answer
verified

If debt is to be used to finance a project,then when cash flows for a project are estimated,interest payments should be included in the analysis.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Any cash flows that can be classified as incremental to a particular project-i.e.,results directly from the decision to undertake the project-should be reflected in the capital budgeting analysis.

Correct Answer
verified

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Correct Answer
verified

Correct Answer
verified

In cash flow estimation,the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

Correct Answer
verified

Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?

Correct Answer
verified

It is extremely difficult to estimate the revenues and costs associated with large,complex projects that take several years to develop.This is why subjective judgment is often used for such projects along with discounted cash flow analysis.

Correct Answer
verified

Typically,a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation.This is because the total cash flows over the project's life will be higher if accelerated depreciation is used,other things held constant.

Correct Answer
verified

In your first job with TBL Inc.your task is to consider a new project whose data are shown below.What is the project's Year 1 cash flow? Seles revenues $\$ 22,250$ Depreciation $\$ 18,000$ Other aperating casts $\$ 12000$ Tax rate $35 \%$

Correct Answer
verified

Exam 11: Cash Flow Estimation and Risk Analysis

Correct AnswerverifiedShow Answer

Changes in net working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets,not working capital.

Correct AnswerverifiedShow Answer

To increase productive capacity,a company is considering a proposed new plant.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The change in net working capital associated with new projects is always positive,because new projects mean that more working capital will be required.This situation is especially true for replacement projects.

Correct AnswerverifiedShow Answer

If debt is to be used to finance a project,then when cash flows for a project are estimated,interest payments should be included in the analysis.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Any cash flows that can be classified as incremental to a particular project-i.e.,results directly from the decision to undertake the project-should be reflected in the capital budgeting analysis.

Correct AnswerverifiedShow Answer

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In cash flow estimation,the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

Correct AnswerverifiedShow Answer

Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?

Correct AnswerverifiedShow Answer

It is extremely difficult to estimate the revenues and costs associated with large,complex projects that take several years to develop.This is why subjective judgment is often used for such projects along with discounted cash flow analysis.

Correct AnswerverifiedShow Answer

Typically,a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation.This is because the total cash flows over the project's life will be higher if accelerated depreciation is used,other things held constant.

Correct AnswerverifiedShow Answer

In your first job with TBL Inc.your task is to consider a new project whose data are shown below.What is the project's Year 1 cash flow? Seles revenues $22,250\$ 22,250$22,250 Depreciation $18,000\$ 18,000 $18,000 Other aperating casts $12000\$ 12000$12000 Tax rate 35%35 \%35%

Correct AnswerverifiedShow Answer

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Correct Answer
verified

In your first job with TBL Inc.your task is to consider a new project whose data are shown below.What is the project's Year 1 cash flow? Seles revenues $\$ 22,250$ Depreciation $\$ 18,000$ Other aperating casts $\$ 12000$ Tax rate $35 \%$

Correct Answer
verified